Breaking The ERI Silence: How Offshore Investments Can Increase The Complexity Of Tax Reporting

When navigating tax laws and gathering the right information to ensure compliance, investments in offshore funds may present a challenge for family offices. With offshore investment funds growing in popularity, the first thing to know is that holders are liable to tax on income and gains even when it is not obvious that any income has been generated. His Majesty’s Revenue and Customs (HMRC) is clamping down on offshore financial interests, increasing the number of investigations and applying fines for offshore reporting errors.

To put things in context, offshore funds are classed as either reporting or non-reporting. Whereas UK-based investment funds are generally required to report the amount of undistributed income to their UK investors, offshore funds (if non-reporting) do not have to. If they choose, an offshore fund can apply for UK reporting fund status, mandating them to disclose the income they have accrued during the financial year.

The income earned from a reporting fund during a reporting period that is not distributed is called excess reportable income (ERI). ERI may be thought of as an additional profit that accumulates in an offshore fund, i.e., a notional distribution. Gains on disposals of reporting funds are subject to capital gains tax (CGT) at a rate of up to 20 per cent; this is in contrast with non-reporting funds, which are subject to income tax up to 45 per cent.



ERI payments are usually declared and payable six months after the fund’s accounting period ends. If a trust is being shut down and is unaware of the pending ERI amount, the exit charge for the value of the trust may need adjustment to account for the payment. On a positive note, the amount of ERI subject to income tax can be added to the CGT base cost of the reporting fund units, thereby reducing the capital gain when the units are sold. If a trust invests in a non-reporting fund, any gains made when sold are treated as subject to income tax but losses are offset against capital gains.

Another aspect to be aware of is that a fund can change status. For example, if it changes from non-reporting to reporting then the default treatment of a disposal of one’s existing units is income tax on any gain, even if the fund is classed as reporting at the time of exit or sale, unless one makes a deemed disposal election.

Charitable trusts are exempt from tax on reportable income, so no tax is owed on ERI distributions payable to a charitable trust. Therefore, if a charitable body disposed of units in a reporting fund, it also would not treat any ERI payments as additional acquisition cost for those units. Crucially, this level of detail is not always reflected clearly in the tax pack received from wealth managers and may not be accounted for.


Examining Portfolios

When the information is not provided in the tax pack, it is easy to assume that there is nothing to report. Indeed, this may be true for some funds as the payment may be nil. However, checking for potential ERI amounts on offshore funds every year is vital when completing tax returns. Often a fund’s year-end is in a previous tax year, so it is essential to check the previous year’s portfolio as well.

Unfortunately, ERI information can be difficult to obtain and the extra time needed should be factored in to prepare accurate tax returns. Although a reporting fund is usually displayed on HMRC’s list for the same, this information does not flow through well enough to accountants. It would be beneficial for everyone if the data were more visible and included in tax packs as standard.

Offshore investing is a complex area, creating challenges not only for family offices but also the industry as a whole. One must know exactly what a client’s portfolio includes. Check for offshore funds and whether they are reporting or non-reporting so as to be fully aware of the income tax and CGT consequences, and ensure one is able to make the correct elections if a fund changes status.


First published in STEP Journal on 19 October 2023

By Michael Edwards, Managing Director of Financial Software Limited